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Federal Medicaid Funding Is Failing the States that Need It the Most

Wealthier, healthier states receive far more than those with fewer taxable resources and less healthy populations. Congress could do a lot to narrow this fairness gap.

Money and health care image
Over the last eight months more than 11 million people have been removed from Medicaid after COVID-era rules guaranteeing continuous coverage expired. As states work to reset their Medicaid rolls while ensuring that needy recipients stay on the program, federal policymakers should seize the opportunity to fix long-standing inequities in how the health care program is funded. As my new research makes clear, wealthier states with healthier residents are getting more than their share.

Although broad federal guidelines apply nationwide, Medicaid is largely structured and operated by individual states. As a result, Medicaid enrollees in some states enjoy an extensive package of benefits — such as optometry services, chiropractic care and physical therapy — while other states impose tight restrictions on the types of services covered. State eligibility rules vary widely too. In Alabama, for example, a parent seeking coverage must not earn more than about $4,500 annually, while in Connecticut a parent may earn up to about $40,000.

In part, these differences are rooted in political attitudes about helping the poor, but policies are also shaped by states’ fiscal constraints. Each year, the federal government sends more than $600 billion — about 10 percent of its total budget — to states to try to ensure that a basic health care safety net exists throughout the country. But the rules for determining how much money a state receives are outdated and counterproductive, often resulting in more resources being funneled to wealthier states than to those in desperate need of additional funding.

States receive vastly different amounts of federal Medicaid funding under a set of rules that were originally devised in 1965 and have barely changed over the last six decades. In 2019, for example, Alaska and the District of Columbia received more than $20,000 in federal Medicaid funds per resident living below the poverty line, while Georgia received less than $5,000.

Some level of funding disparity might be justified if more federal aid was being directed to states with fewer means of generating their own revenues or to those with more severe health needs. But that’s not the case. In my new research, I find that Medicaid’s current financing structure consistently undermines Congress’ intent of equalizing state contributions to Medicaid.

For instance, I find that states with larger tax bases receive substantially more federal Medicaid dollars than others. Wealthy Connecticut is one such state. It received about $15,000 in federal Medicaid funds per person in poverty in 2019. Meanwhile Mississippi, the state with the smallest tax base per person in poverty, received only half as much federal Medicaid assistance. These aren’t cherry-picked examples. Other states with large tax bases, such as Maryland, Massachusetts and New York, also receive disproportionate federal Medicaid dollars, while far less per-capita aid is directed to states with fewer taxable resources, including Alabama, Georgia and Oklahoma.

Federal funding also fails to reflect how healthy a state’s Medicaid population is. The state with the healthiest poor population, Hawaii, received more money in 2019 than the state with the least-healthy poor population, Kentucky.

None of this makes any sense. Instead of compensating for differences in states’ abilities to financially support a health care safety net, federal Medicaid money is amplifying those differences.

Congress should act to remedy these flaws. One option is to remove the arbitrary limit on the share of total Medicaid spending the federal government covers. Currently, every state — no matter how wealthy — pays no more than 50 percent of the costs of its Medicaid program. Requiring affluent states to contribute more would generate federal budget savings that could be used to enhance assistance to states with greater needs.

Another more ambitious approach would be to fundamentally reform the Medicaid formula to include more accurate measures of states’ fiscal resources and health needs. The current formula is based entirely on average personal income, which does a poor job of capturing all of the factors that determine Medicaid’s costs.

Either approach would be an improvement on the way things are done now. By failing to address Medicaid’s regressive funding structure, Congress is contributing to staggering disparities in the health care services available to poor families across the country.

Liam Sigaud is a postgraduate fellow in the Open Health Project at the Mercatus Center at George Mason University.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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